The investment trust initial public offering (IPO) market had been fairly strong over recent years, with nearly £11bn raised between 2013 and 2015, according to broker Numis Securities. This included last year's whopping £800m offering from Woodford Patient Capital Trust (WPCT), the largest ever UK domiciled investment company raising.
However, move on to 2016 and in the year to date there have been no investment trust launches. One reason for this, according to Numis, is uncertainty as asset managers wait to see whether the UK votes to leave the European Union (Brexit) next month. If this happens, there could be changes to the legal and regulatory landscape, while it is almost certain that there will be fairly severe UK market volatility - at least in the run-up to the vote. And Numis says that investors are wary of making asset allocation calls before they know what the outcome is.
An investment trust tried to launch earlier this year - Healthcare Royalty Trust - which was seeking £200m to invest in healthcare royalty assets, targeting a total return of more than 10 per cent over the medium term, including a dividend yield of 6 per cent a year. Despite the attractive income profile - a feature that has characterised many investment trust IPOs of recent years - the launch was pulled in April "in light of unfavourable market conditions".
"Discounts have widened, particularly among the specialist debt funds, which raised a significant amount of capital last year, and we expect investors to remain cautious about buying new funds ahead of the Brexit vote in June," comments Numis.
But is a dearth of IPOs a concern for private investors? There is already plenty of choice among existing active funds, with more than 400 investment trusts listed in London, and several thousand open-ended funds. These provide multiple options for accessing all the mainstream areas of investment that account for the majority of investors' portfolios, and a good selection of less mainstream options.
Even if an investment trust IPO was a relevant addition to your portfolio (you should not add any new investment if it does not have a place in your overall investment strategy and asset allocation plan), there are a number of reasons not to go in at launch.
When you buy at IPO there are launch costs so, for example, for every pound you put in maybe only 98p gets invested, meaning you are in effect buying at a slight premium.
A number of more recent equity investment trust IPOs have only raised £50m-£100m and failed to reach their target size. Smaller trusts are likely to have higher ongoing charges as the costs are spread across a smaller base, which eats into more of your returns.
Some recent launches are trading below their issue price and on discounts to net asset value (NAV). This includes some of the peer-to-peer lending investment trusts. So you could be better off waiting until after launch and buying in at a discount to NAV, although it can be hard to predict whether this will happen. A number of more recent launches have offered high yields and the typical pattern here has been to move to a premium, so buying at IPO may have seemed like a good option.
As a private investor dealing in small amounts, even with trusts that do not have much trading of their shares (poor liquidity), you are likely to be able to get the relatively small amount you want, although there might be a wide bid-offer spread.
New trusts don't have a track record to assess and there may not be as much information about them as there is for existing trusts.
If a trust plans to invest in illiquid assets, it could take some time for the money to be invested and returns to come through. And new trusts are unlikely to pay dividends from the start - this often happens in the second year - unlike when you buy a more mature trust on the secondary market.
A new trust will also not have built up revenue reserves like some mature ones, which can draw on these to maintain or continue increasing dividends if the underlying assets do not generate enough income in a given year. The ability to maintain and raise dividends using the revenue reserve is one of the key attractions of investment trusts.
Meanwhile, of the 326 investment trusts launched between 2000 and 2009, 208 no longer exist. Four have merged with other funds and 31 have adopted a realisation strategy, meaning only 83 survive, according to Numis. Poor performance, wide discounts to NAV and a focus on assets that are no longer relevant to current investors are among the reasons for the wind-ups.
If a trust winds up, investors who have already paid the IPO costs are likely to face further costs to enable this to proceed. For these reasons some analysts only suggest you buy into a new trust if there is not an existing one focused on that area that trades at a reasonable price.
So rather than looking out for the next hot new launch if and when investment trust IPOs pick up, you could be better off monitoring the discounts/premiums of established and more successful trusts, moving in when you see what looks like an unjustified and temporary discount. And while you wait for it to narrow, get paid an attractive, secure and rising dividend stream.
